Dexteyra Consulting Group Inc.

Strategic Markets to Lead Global Economy out of Recession

M.S. Oberoi*

May 10, 2010

Overview

Over the last three years, we have been reading from different economists about their view on the recession. From a Management Consultant?s stand-point, I see that even during the peak of recession, there have been some limited financial activities that drove the sustainability of large consulting companies and the industry in general. Most of these activities related to the business that was driven by life sciences, food, and beverage manufacturers. Yes, now we are talking about a segment of fast moving consumer goods (FMCGs).

Life sciences manufacturers, among the three had witnessed comparatively the largest economic activity during the period when assembly lines in most other industries involving industrial, automotive, and even financial companies were struggling with low capacity utilization or were being shut down.

Life sciences manufacturers are primarily divided into pharmaceutical, medical devices, and bio-technology manufacturers. Among these three segments, the pharmaceutical manufacturers are expected to have higher growth rates because pharmaceutical products reach directly to the end-users.

Besides, the current Presidential Administration in the USA has a specific focus on the health services market. With new medical reforms, there will be more people within the country who will be able to afford healthcare, and that will drive the sales of drugs and medicines. There can be an impact on pricing, but the increased volumes will absorb that effect. Reasons for pricing pressures include higher competition in the sales of generic drugs, healthcare reforms, increasing costs, and so on.

The baby boomers have been on news for some reasons or other during the last few decades. At this time, the generation of baby boomers is reaching retirement age that will drive higher volumes in the sales of pharmaceutical products.

As far as medical devices and biotech markets are concerned, they complement the services of healthcare providers. Medical device manufacturers, for example, provide equipment and consumables, but these products have relatively very long life cycles. And considering the current economic situation, most hospitals can delay procurement of new devices. Consumables market such as for syringes and gloves will continue to grow moderately because businesses will like to optimize the use of their resources.

Growth in biotechnology is driven more due to research as compared to volume sales. There is continued funding in this segment, but the growth is believed to be relatively slower. Indeed, there is an overlap between the life sciences vertical markets that will have to be considered while talking about strategic markets that have the potential to lead the world out of recession.

Rate of growth in cross vertical markets

The collapse of the financial markets in North America has led the entire world into a long, gloomy recession. We have witnessed for decades that the health companies have grown at much higher pace in North America when compared to other industries including hi-tech. High-tech industry has gone through the cycles of bubble and bust. One exception is the wireless telecom market in the current context. Since the telecom, computing, and home electronics are merging and the industry continued to evolve through innovation by introducing 3G (third generation) wireless telecom networks over the last few years, it continued to grow even during the economic downturn. Now the wireless telecom industry in the US is implementing 4G while Canada witnessed an investment of US $750 million in the sector in the year 2009.

Interestingly, the beauty industry and cosmetics manufacturers have witnessed their sales fall down by as high as 50%. Industrial sectors are still under recession and will take at least few more years to catch up with their factual impetus. Therefore, the growth rates of health companies would continue to be higher at least in the next few decades.

From an emerging vertical perspective, SAP?s solution in banking domain is a new technology that has a large potential to grow. Trend is that banks in Europe and Australia are implementing SAP currently. It is projected that once the economy stabilizes in North America, the banks here will implement the solution as well. Commonwealth Bank of Australia (CBA) is currently implementing SAP?s banking solution at a cost of US $730 million along with a partnership with Accenture. It is very unusual to witness such large budgets for SAP implementations that traditionally span between US $20-50 million in logistics domains. Currently, large banks such as UBS AG, Deutsche AG, and Bank of Canada to name a few are implementing SAP.

Large or middle market companies?

It has been an on-going debate for a very long time. I think that considering the current economic perspective, there is more scope for innovation for middle market companies to catalyst an economic recovery. The growth will be primarily driven by volumes as the industry is facing acute pricing pressures. Larger companies have already established distribution channels that are loaded up to their capacities, leaving more scope for mid market companies who can drive their volumes through newer drug discoveries and product innovation. Larger companies, however have an advantage that they can position their products at comparatively cheaper rates.

Therefore, the engines to drive growth in the next few decades will include increased volumes and product innovation such as introduction of new drugs, medical devices, and biotechnology. Innovation is the life-blood of any industry, primarily aimed at generating greater revenues for business. Companies are not merely paying lip-service to innovation. There is true business impact that will be greater than merely increased volumes of current products. Moreover, innovation helps keep pricing pressures at bay because newer drugs inherit a premium price tag.

Growth rate for industry in general

The manufacturing and services industries are still recovering from its worst economic downturn after the Great Depression of the 1930s. The unemployment rate in the USA dipped from 10.2% during March 2010 to 9.9% in April, though still the numbers are not as exciting. A true economic revival in North America may not be possible in the second quarter at least because the home foreclosure rate has gone up by 15% in January and 57 banks have already closed shop as of March 2010 and handed-over their keys to the US Federal Deposit Insurance Corp (FDIC). The bottom-line is that we are continuing to witness everything that brought the world economy to a standstill over the past two years.  Though the Western European economies had seen some signs of revival derived from their respective Government?s economic stimulus packages, the second quarter news in 2010 is not as encouraging. The world still has the risk of heading into a double dip recession. I would believe that economy will return to its 2006-08 growth impetus by 2012.

Though contrarily, most economists have reached a consensus that the world is recovering from the recession. They also feel that it will be a "different" kind of recovery such as a jobless recovery, slower non-traditional growth, and so on.

Conclusion

Be it recession or not; food and drugs will sell and that will drive an economic activity. It holds true even in the current scenario when the financial markets have collapsed to such a great extent and the banks continue to close shops in the USA. The regulations are becoming harder that will drive more business for the elite IT and Management consulting service providers. The health-care reforms by the current Presidential Administration in the USA will drive higher business for the life sciences and related industries because more people will have access to health-insurance. Traditional health-insurance companies may find it difficult to sustain in the future unless they re-organize themselves with reforms.

 

*Mandeep S. Oberoi works as Director & Principal Consultant with Dexteyra Consulting Group Inc. He has also worked with large consulting firms such as Hewlett-Packard Canada’s Business Consulting Group and Capgemini USA LLC, among others. Some of his key past clients include Canada Revenue Agency (CRA), Bank of Canada, MolsonCoors Brewing Company UK, Winnipeg Regional Health Authority, Ministry of Works - Government of Trinidad & Tobago, and Bacardi Rum, among others. He specializes in designing SAP Best Practices based banking, finance, public sector management, and supply chain solutions. Mr. Oberoi has worked on projects across North America, Caribbean, Europe, and Asia Pacific. He was awarded a Medallion by the Indian National Academy of Engineering (INAE) in 2001.


 

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